1. Suppose a country A is at potential GDP and the government decides to balance the fiscal budget by reducing government spending.Illustrate the short-run effects on GDP, interest rates, and prices using an IS-LM graph and an AD-SAS graph (short-run means assume nominal wages are fixed).Using the graphs, illustrate and explain what would happen in the short-run to GDP, interest rates, and prices if the Fed targets the money supply
2. Suppose the country that is reducing government spending instead follows the Taylor rule.Using two new graphs (both IS-LM and AD-SAS), illustrate and explain what would happen in the short-run to GDP, interest rates, and prices.
3. Suppose the country that is reducing government spending instead follows the Taylor rule.Using two new graphs (both IS-LM and AD-SAS), illustrate and explain what would happen in the short-run to GDP, interest rates, and prices